Independent real estate developers were almost wiped out by the Great Recession. These two entrepreneurs predicted it and thrived--and now they're betting big on what they say is an inevitable boom.

Left: Peter Wells, a former dentist and Marcel Arsenault's longtime partner, travels the country–and sometimes the world–to oversee RCS construction projects. Right: RCS founder Marcel Arsenault went from making all-natural ice cream to running a real estate company with a $1.6 billion portfolio.

CREDIT: Jamie Kripke

Peter Wells has just returned from the Mediterranean coast of Spain. It was not a vacation. Instead, Wells spent days stomping around Andalusia's Costa del Sol in workboots and a hard hat, checking up on his latest real estate project. Along with his longtime partner, finance guy Marcel Arsenault, Wells is building luxury beachfront condos to sell to rich Europeans and Middle Easterners looking for second (or third) homes. He shows up periodically to scout new deals and to make sure the construction is meeting American standards. After all, some of his local competitors "sell units without kitchens, no cabinets and appliances at all," he claims. "There's no lighting. Just bare wires hanging from the ceiling."

Then it's back to Colorado, where Wells trades waterfront concerns for the mudrooms and heated floors of ski-resort townhouses in Breckenridge. A lifelong skier (and lapsed dentist), Wells knows this territory particularly well. Wherever he's dispatched, Wells is used to being Arsenault's eyes, the one who actually checks on the things they're building together: "I'm the partner on the ground," he says.

That's in part because Arsenault really isn't that interested in real estate, which is a bit weird for a guy who makes a living--a fortune, actually--in the business. Sure, he'll travel to meet with investors and bankers, but as for the buildings themselves, "I usually don't look at them anymore," says the founder and CEO of Real Capital Solutions, a Louisville, Colorado-based independent real estate company that invested $250 million in housing last year.

In the past 20 years, Arsenault has built an entrepreneurial empire financing, developing, and building houses, apartments, and office towers. The ponytailed mogul, an aging hippie by appearance and a scientist by training, runs his company from a charmless low rise outside of Boulder. He does so by relying on Wells, his primary development partner, who doesn't have a job title at RCS--but who knows what kind of kitchen you need to build in a Dallas condo versus one in San Francisco.

What's more unusual is that their company survived the Great Recession, which wiped out the majority of local builders in some areas, and now is thriving in a much tougher environment. That's especially impressive given its relatively small size. Residential real estate construction is a massive sector, generating about $466 billion annually, according to the Census Bureau's most recent figures. What's more telling than outright size, though, is that the publicly traded builders, such as D.H. Horton and Lennar Corporation, have gained market share since the recession but built fewer homes. RCS, on the other hand, is ramping up. Arsenault and Wells, with projects stretching from the Pacific to the Mediterranean, are using their operational know-how and geeky instincts to survive in an industry that is increasingly dominated by giants.

Arsenault says he wants to double down and invest $500 million in real estate in 2017, claiming an outsize portion of a rebounding market--and helping some other entrepreneurial homebuilders flourish too. The 90-employee RCS acts solo or teams with other investors and builders to construct its apartments, standalone homes, and vacation properties. The company has some $1.6 billion in assets under management. Though Arsenault will not disclose total revenue, he says it grew 50 percent last year and is growing at 20 to 30 percent on a compound basis. "We could double from here, no problem," he says. How? "I borrow outrageous amounts of money."

He has $1.8 billion of bank credit lines and is only halfway through them--and because RCS has never defaulted on a loan, Arsenault says, it's exactly the rare type of big, prime borrower that banks are eager to fund.

His company isn't making risky bets on complex CDOs or liar loan mortgages. Instead, it's relying on a counterintuitive approach to stay in the game. From his office desk, Arsenault watches the macroeconomic picture, looking for opportunities his larger competitors have ignored or rejected. "Our unique approach is to focus on the long-term," he says. "That helps us see patterns that others miss."

Thirty years ago, the Canadian-born Arsenault was looking at very different patterns. A molecular biologist who fits right in with the granola types of Boulder, he was working on his PhD in the late 1970s when he got distracted by his sweet tooth. In his kitchen, he concocted one of the nation's first all-natural frozen desserts, Mountain High Ice Cream. (He had a hard time selling the banana flavor because it contained no yellow dye.)

His ice cream tenure was short-lived. As bigger companies followed Arsenault into the natural-foods scene, he eventually sold out to now-defunct conglomerate Beatrice. "It was the fear of being overwhelmed by the big boys coming in and then doing a good job of copying us and putting us under," he says. "Turns out that was completely wrong. We sold the company and they ceased to exist."

But selling the ice cream company allowed Arsenault to turn his hobby of investing in commercial real estate into a full-time affair. "It was a time when real estate was idiot-proof--and I was an idiot," he says. "So I didn't really know the business, but I had done quite well."

Meanwhile, Wells was languishing in a business that might have indirectly benefited from ice cream customers. In the 1980s, he was running a "pretty fabulous" dental practice in the posh ski-resort community of Vail. There was just one problem. He had reached a point at which having to fill one more molar would have made him press the dental drill against his own skull and stomp on the pedal. "I couldn't stand doing it," he says. "And as a dentist, you aren't trained for anything else. Those skills just don't transfer."

He moved to Denver to take up real estate and got a commercial broker's license. One Sunday afternoon in 1992, he decided to cold call one of the known buyers in the market. Arsenault picked up the phone, and Wells kept him talking for more than two hours. While Arsenault had been buying crappy real estate, at least he was buying. Most investors weren't, after a real estate crash in the late 1980s tied to the collapse of the savings and loan industry.

"Most brokers are peddling something," says Arsenault. "So there's always a disconnect between what the customer needs and what they've got to peddle. And Peter didn't have that attitude. He learned who we are, what we were good at." What Arsenault wasn't particularly good at was actually managing the properties he bought; Wells looked at one of his buildings in Boulder and quickly discovered that half the tenants weren't paying rent.

In 1995, Wells heard from the owner of three Denver apartment buildings that had been purchased from the federal government, casualties of the S&L crisis. The owner wanted out. Wells was skeptical at first: "I thought, 'Who in the world am I going to sell this to?' Then I thought, 'What the hell--why don't I do it?'"

He pitched Arsenault, who ran the numbers on the buildings and--sight unseen--agreed to go in with Wells. "He didn't know anything about condos, and frankly neither did I," says Wells. Still, the pair managed to avoid major mistakes, and realized they clicked as partners. As Wells recalls, "We thought, 'Well, that wasn't terrible. Let's try it again.'"

It wasn't all that easy. The pair barely managed to make money on their next deal--they did a poor market analysis, miscalculated the underwriting, and scraped through with only a small profit--but they established an operating pattern that would serve them well for the next two decades as they expanded to nine other states. Wells would run the projects and make sure that bills got paid, while Arsenault would stay indoors and look for the underlying business opportunities.

After initially stumbling around the real estate business, the biologist-turned-idiot-investor realized he could apply his scientific training to a different kind of discipline: macroeconomics. Arsenault no longer wanted to invest in things he didn't understand--a mistake that many in the housing industry would make in the runup to the real estate crash.

"I'm pretty geeky. I like cycles, and I like understanding what happens in cycles," he says. "The advantage was that I was able to see the downturn coming. If we had expanded into the crash, we would have been crushed."

Years before the crash, he began analyzing all the data he could get his hands on, reading "widely and deeply": reports from the St. Louis Fed, Fannie Mae, Harvard's Joint Center for Housing Studies, and the Organisation for Economic Co-operation and Development. And he tapped industry experts, including Liang Peng at the University of Colorado and Greg Lippmann, the mortgage trader made famous by The Big Short for predicting (and winning huge bets on) the housing crisis.

Arsenault was seeing warning signs, the biggest being that too many people were in houses they couldn't afford. The home ownership rate of 69 percent was 2 points too high, he figured, meaning that 2.25 million houses were in the wrong hands. Once prices began to fall, he predicted that mortgages underwritten at high values would start defaulting, causing a cascade of foreclosed homes to hit the market in 2008. "Housing Causes a Hard Landing" was the title of one internal paper he wrote in 2006.

Meanwhile, Wells was finding similar evidence in the field. Take the condos that RCS was investing in building: A 3 percent down payment was standard at the time, but more people started showing up with no money down, taking advantage of various government- and developer-funded programs designed to encourage homeownership. Then there was the outsize demand: In 2005, a day before RCS started selling condo units for a building in Tucson, Wells stopped by the sales office and was alarmed to find buyers already lined up around the block.

The pair considered it "a sign from God," says Arsenault. They agreed to start liquidating as fast as they could, ultimately selling about 85 percent of RCS's residential properties.

For the next two years, Arsenault and Wells waited out the worst of the housing bust overseas. In Spain, which had suffered an even worse downturn than the U.S., they scooped up distressed waterfront properties that they could resell to investors looking for cheap vacation homes. By 2009, while much of the U.S. was still reeling from the Great Recession, Arsenault and Wells started seeing new opportunities. And, they realized, they were among the few independent players poised to take advantage of a coming real estate rebound.

Since Arsenault and Wells started reinvesting in the U.S. housing market, they've counted on two diverging trends: a coming surge in demand for new homes, and a plummet in the number of entrepreneurs who can build them.

While home ownership rates are widely declining, more than 62 percent of Americans remain owners. The 84 million-strong Millennial generation has the potential to become the largest home-buying generation ever. Meanwhile, their parents in the Baby Boomer generation--the nation's second largest at 80 million, and by far the richest American generation ever--are fast becoming step-down buyers, trading in their larger homes for smaller pads, as they progress through to adult communities and assisted living.

RCS is betting on what it, and economists generally, sees as the next housing boom, driven by a cycle of new demographic and econometric forces. "We believe favorable demographics and the realization of pent-up demand will drive a strong upward trajectory in housing demand through 2020," Morningstar analyst Brian Bernard wrote in a July report on Lennar Corporation, one of the big public homebuilders. (Morningstar and Inc. share an owner.)

Arsenault calls it a "silver age" of housing--silver, because there are still enough unknowns in the global and domestic economies to produce a recession at some point, but conditions are rebounding sufficiently to have his firm preparing for a surge in demand and investing in once-distressed markets like Las Vegas. Household formations are growing at 1.3 million to 1.4 million annually, according to recent Census Bureau figures; new construction is at 700,000 to 800,000 units annually; throw in demolition of old housing stock, and you come up short some 700,000 housing units.

"If you take those long-term demographics, then an abnormally large number of people are making decisions around home buying," says Jonathan Smoke, chief economist for Realtor.com. "At the very least, we are going to have above-average historical numbers being required on the new construction front."

This housing shortage isn't restricted to the famously ridiculous San Francisco market. Go up the coast to Tacoma, Washington, where RCS has several condo projects, and home prices are up 25 percent in two years. Or travel to rapidly growing Jacksonville, Florida, near where RCS is building homes; the city's average property sells in 51 days, nearly 30 percent faster than the national average, according to Realtor.com.

What's missing from the equation are local homebuilders. Prior to the meltdown, the top 200 builders controlled just 43 percent of the homebuilding market, according to Builder, an industry trade publication. In many communities, local builders tied to local banks did the bulk of the home-construction business. But after the recession, many such entrepreneurs never got a chance to reboot. They had no funding to do so: The meltdown wiped out national subprime lenders such as Washington Mutual and hundreds of local banks that had had large real estate portfolios. For many surviving lenders, real estate became radioactive.

That's where RCS and its spigot of financing comes in. By surviving in this consolidated market, Arsenault and Wells are also boosting the prospects of other real estate entrepreneurs. Take Bob Comstock, CEO of Comstock Homes and a veteran California developer-builder, who says the vast majority of the builders in his state were victims of the die-off.

In 2011, Comstock almost became one of them: His bankers told him to get lost, right as he was putting together two projects with more than 600 units. But after a six-month search to find replacement financing, Comstock landed RCS.

"Marcel and I partnered up on finishing off two projects, which turned out to be a grand slam," recalls Comstock, who now has 14 active projects with RCS. "And then we became friends," he adds. "We're both a little bit odd, but he sees things differently."

"I was able to see the downturn coming. If we had expanded into the crash, we would have been crushed."

Flush with cash by 2011, RCS began to expand its portfolio again, but there was a major obstacle: Where was it going to find the builders who were good enough to execute its plans? Some developers had run into roadblocks with financing, but many others were just bad at running a business.

Arsenault and Wells had had several unhappy experiences. For example, in Spain: Not knowing local contract law or building codes, RCS had expected to make some mistakes that would cost it along the way. It did. Spanish banks, for instance, did some real estate development themselves. (Imagine asking for a construction loan from a competitor.) The Americans also discovered that "everybody still wants a 'commission,'" says Wells. Their initial investment in a local builder went south when the firm turned out to be taking kickbacks from contractors.

"The deals go wrong around the people," says Arsenault. "So the idea is to try to handicap the partner." He set out to develop a formula for a model entrepreneur, just as you might for a model home. It starts with transparency: RCS designed a disclosure form that's somewhere between a job application and an FBI security clearance. Besides demanding transparency, RCS looks for signs of weakness. For example, it avoids investing in those who come to the table with cheap capital. That could invite amateurs or dabblers. It also shuns those who are too diversified to pay attention to the project.

On the other hand, the company takes calculated risks on undervalued entrepreneurs. In the case of a luxury condo project in Dallas-Fort Worth, RCS decided to work with Realty Capital, an established local builder that couldn't find a lender for its ambitious project. "They couldn't get a 40 or 50 million-dollar loan," says Wells. "But we were impressed by a number of things, including the number of presales."

Realty Capital also had no experience in building condos, and the suburban location was a red flag. "We were turned down by dozens of people for financing," says Richard Myers, a managing director of Realty. "They were able to get beyond the conventional thinking to 'maybe there's a market here.'" RCS figured that its potential investment met 60 percent of its requirements--but what Realty lacked, RCS could supply. "There's just so much that goes into a condo building, whether it's design or working with homeowners associations, that they just haven't done. We're able to contribute greatly," says Wells.

Arsenault claims that every entrepreneur in a partnership has a distorted reality field, including him. One of the biggest distortions is optimism, which to an entrepreneur can be the same as breathing. Learning to hold your breath is a key to success, he says: "In real estate, 'go' will get you into trouble if you're going at the wrong time. You gotta have 'stop' and 'reverse' and 'get the hell out.'" Or as Wells puts it, "We always look at the downside on every deal. We look at that 10 times more diligently than the upside." This may mean passing up some potentially lucrative opportunities. Even as RCS and its partners plunge ever more money into single-family housing, Arsenault's macromodeling is telling him that the cycle is becoming less favorable for apartments, especially in his home market of Denver. So he's taking a pass locally for now. Arsenault and Wells are too experienced to think there won't be any hiccups in the real estate market over the next decade. Arsenault's best guess is for a mild recession in 2019 as growth slackens. Ironically, the fact that a Republican real estate developer is now president doesn't necessarily bode well for the industry: Mortgage rates are already rising, and the Fed has signaled its intention to raise interest rates again this year. But there's less risk of another meltdown, because subprime buyers are unable to get mortgages. Barring that, if Arsenault's early-warning system remains tuned, they'd be among the first to exit.

Ever the contrarian, Arsenault is now sniffing around the beaten-down oil patch. In places like Houston, Calgary, Alberta, and Oklahoma City, where office vacancy rates approach 30 percent, "we'll be looking for partners to buy residential and office." He's even considering directly investing in oil and gas properties, because his macro analysis sees a cycle change that will push oil up to nearly $60 a barrel within a couple of years. "As you grow, things change. Your environment changes, the scale changes, your problems change, and each time they change, you have a new learning curve," says Arsenault. "That's one of the reasons why I love the business."

Then again, once you learn how to ride a business cycle, you never forget.

How this real estate company demands radical transparency:

Partnerships can be both profitable and perilous--especially in the complicated, conglomerate-dominated real estate world. But Marcel Arsenault's Real Capital Solutions has weathered boom and bust by investing in exactly the right companies.

Arsenault is a proponent of full disclosure: Show him your dirty laundry and he'll do likewise, creating a basis of faith and full transparency. "I want to put it on the table," he says. "What about you would surprise me? If you've gone broke, or had a fight with a contractor, or lawsuits--tell me."

Such past sins might not scuttle a deal--but hiding them will. "Here's the rule," Arsenault adds. "You can tell me now, or if I find out about it and you haven't told me, it's over."

Prospective RCS partners have to list all their previous deals and relationships, their banking ties, legal histories, and even personal information--such as whether they've been arrested for DUI or drug possession. "RCS is pretty much a hands-on operator," says Bob Comstock, the head of homebuilder Comstock Homes, which has taken RCS financing. "It pays attention to everything--probably, from our perspective, a little too much."

Arsenault fills out the same form. He's already detailed his faults in an internal document that includes a section called "What Marcel Is Not Good At." These include being overly "mathematical and dispassionate." He pleads guilty: "I'm a pain in the ass."

His long-term development partner, Peter Wells, wouldn't use those exact words. That might be politic: Wells is the rare exception to Arsenault's rule, never having filled out the form. Still, their relationship runs exactly as it's meant to: "Marcel is a strong personality and some of his employees have a hard time voicing their opinion," Wells says. "But as a partner, I've got no problem."